The document discusses Small and Medium Enterprises (SMEs) in Bangladesh. It provides definitions of SMEs according to the Bangladesh Bank and Ministry of Industries. SMEs make up the majority of businesses in Bangladesh and employ a large portion of the workforce. However, SMEs face significant challenges, particularly related to access to financing. While past economic reforms helped reduce barriers against SMEs, more proactive policies are still needed to promote their development and address constraints such as lack of adequate public funding and support.

1. Introduction
The Small and Medium scale Enterprise (SME) are recognized worldwide as engines of
economic growth. The commonly perceived merits often emphasized for their promotion
especially in the developing countries like Bangladesh include their relatively high labor
intensity, dependence on indigo nous skills and technology, contributions to entrepreneurship
development and innovativeness and growth of industrial linkages. The case for fostering SME
growth in Bangladesh is irrefutable as these industries offer bright prospects for creating large-
scale employment and income earning opportunities at relatively low cost for the un-and
unemployed especially in the rural areas strengthening the efforts towards achieving high and
sustained economic growth which are critically important prerequisites for triggering an exit
from endemic poverty and socio-economic deprivation. These promotional arguments for the
SMEs, while universally emphasized are often put forward by their ardent advocates in a small
versus large context an d thus arouse serious debates concerning their economic viability. Much
of such controversies may, however breakdown if the intrinsic virtues specific to SMEs and
unavailable to large-scale industries are correctly identified and carefully exploited. A combined
interaction of the forces of product-mix, location factors, technological advantages and market
advantages create opportunities for SMEs to grow and prosper at all levels of development
which are often ignored by the traditional approach to their economic strengths and
development potentials. The growing economic significance of the SMEs as sources of new
business creation and employment generation in the developed, countries especially since 1970s
is now widely recognized in an increasingly growing volume of literature. The recent
structural shifts in industrial production from the Florist approach of mass production to more
flexible and adaptable production regime in response to constantly changing market
opportunities have led to a notable resurgence of these industries in the West. The re-emergence
of the SMEs in the developed world makes economic case for fostering development of these
industries stronger than ever before.

2. SME
SMEs appear to be facing discriminatory competition from the commercial activities of NGOs.
On the other hand, smaller units may be receiving valuable assistance in the form of training or
market information from the NGOs. NGOs should be promoting small businesses and not
themselves become competitors – crowding out private enterprises. Further research and debate
on the role of NGOs in promoting SMEs is propounded
SME Financing: present status & Contribution to our Economy:
SME (Small and Medium Enterprises)
SME business is a non-public limited companies but a business for self-employment or for social
welfare.
>According to the latest circular of BANGLADESH BANK (Date – 26/05/2008), the definition
of Small & Medium Enterprise sector is given below:
►Small Enterprises – Small enterprises refer to those enterprises which are not any Public
Limited Companies and which fulfill the following criteria-
1. Service Concern- Having an investment of Tk. 50,000 to Tk. 50, 00,000 excluding land &
building and / or employing up to 25 workers.
2. Business Concern – Having an investment of Tk. 50,000 to Tk. 50, 00,000 excluding land &
building and / or employing up to 25 workers.
3. Manufacturing Concern – Having an investment of Tk. 50,000 to Tk. 1,50,00,000 excluding
land & building and / or employing up to 50 workers.
►Medium Enterprises – Medium enterprises refer to those enterprises which are not any
Public Limited Companies and which fulfill the following criteria-
1. Service Concern- Having an investment of Tk. 50,00,000 to Tk. 10,00,00,000 excluding land
& building and / or employing up to 50 workers.
2. Business Concern – Having an investment of Tk. 50,00,000 to Tk. 10,00,00,000 excluding
land & building and / or employing up to 50 workers.
3. Manufacturing Concern – Having an investment of Tk. 1,50,00,000 to Tk. 20,00,00,000
excluding land & building and / or employing up to 150 workers.

3. Partition of SME Enterprises:
SMEs in Bangladesh are also defined for purposes of industrial policies by Ministry of Industries
(MOI). Historically, this definition has been in terms of fixed investment brackets, and a dual
mode definition is in place, separate for manufacturing establishments, and service
establishments.
>According to the Industrial policy 2005, small and medium enterprises shall be categorized
using
The following definitions:
Manufacturing enterprise:
Small Enterprises
An enterprise should be treated as small if, in current market prices, the replacement cost of
plant, machinery and other parts / components, fixtures, support utility, and associated technical
services by way of capitalized costs (of turnkey consultancy services, for example), etc.,
excluding land and building, were to be up to tk. 15 million;
Medium enterprise
an enterprise would be treated as medium if, in current market prices, the replacement cost of
plant, machinery and other parts / components, fixtures, support utility, and associated technical
services by way of capitalized costs (such as turnkey consultancy services), etc., excluding land
and building, were to be up to tk. 100 million;
□Non-manufacturing enterprise:
Small enterprise – an enterprise should be treated as small if it has less than 25
Workers, in full time equivalents;
Medium enterprise – an enterprise would be treated as medium if it has between 25
And 100 employees.

4. The SME sector of Bangladesh
Access to credit is now considered as „human right‟ not „gift‟ or „sympathy‟ of an individual or
an institution. Recently there has been a phenomenal growth in activities of microcredit in
many countries, especially in the third world. The first Microcredit Summit Meeting held in
Washington DC, USA in 1997 has added a momentum in a global movement to reach 100
million of the world‟s poorest families, especially the women of those families, with credit for
self-employment and other financial and business services by the year 2005. Consequently, the
UN has declared 2005 as the “International Year of Microcredit.” The Year of Micro credit
calls for building inclusive financial sectors and strengthening the powerful, but often
untapped, entrepreneurial spirit existing in communities around the world (International Year of
Microcredit, 2005). While the resurgence of the small and medium enterprises (SMEs) began in
the early 1970s, the trend continued well in the 1990s and has been maintained ever since. The
recent global outburst of interest in SMEs has brought the issue on to the center-stage of
academic discourse as well as of governmental policy making process, especially backed by
proactive donor support. This is the right time to focus on the experiences of Bangladesh, the
birthplace and the country with the biggest and most vibrant microfinance sector. This is because
the microcredit movement is in mature stage in our country, and we have a clearer picture of its
strengths as well as limitations. Necessarily, to move forward for a sustainable achievement, we
need to be more effective, and increase outreach, design products to include the poorest, and
also provide finance for growth and employment oriented SMEs which are needed to spread the
poverty alleviation net wider, so that significant decline in poverty takes place.
Small and Medium Enterprises (SMEs) — Defined
There is no universally accepted definition of SMEs, in fact it is not possible. Because it depends
not only on investment level and number of workers but also on technologies and technical
complexities of production, degrees of skills demanded from workers and managers, end use of
products and so on, which varies from country to country. For example, the EU members state
Germany defines SME as an enterprise with a limit of 500 employees, while in Belgium it is
only 100. There is no standard definition for a small business in the United States also.
Generally it is determined by the industry in which it competes, where income and number of
employees will determine whether a company is a small business or not. Small and cottage
industries (SCIs) in the previous versions of the Industrial Policy of Bangladesh has been
replaced by SME in the Industrial Policy 1999, which defines “small industry” as an enterprises
(excluding cottage units) employing fewer than 50 workers and/or with a fixed capital

5. investment of less than BDT 100 million and “medium industry” as enterprises employing
between 50 to 99 workers and/or with a fixed capital investment of between BDT 100 million
and BDT 300 million. This definition has the second highest upper limit on fixed assets for
SMEs in South Asia and Southeast Asia, after Singapore, and does not accurately reflect the
size of SMEs. However, the existing definition is now under revision in the Industrial Policy
2004, which is yet to be finalized and officially published. Both the existing and the proposed
definitions do not consider other important factors, like technological requirements, technical
complexities of production, degrees of skills required in workers and managers, degree of value
addition and turnover, import requirements, need for working capital, and probable trade barriers
to market access. The lack of any single standard definition makes it difficult to interpret data on
SMEs and target assistance for SME sector development.
SME and Bangladesh
Like many other developing countries, Bangladesh has utilized the traditional “blunt” approaches
to rural development, such as the “green revolution” in agriculture, which was once thought to be
capable of eradicating poverty through trickle-down effects on income and employment for the
poor.to absorb the surplus labor released from agriculture following „capital-intensive‟
technological innovations, which was also failed. The policy makers failed to realize that we
should develop „labor-intensive‟ industries rather than „capital-intensive‟ industries because
Bangladesh is a labor abundant but capital scarce country and SMEs have a natural comparative
advantage. And it is widely claimed that relative to large capital-intensive industries, SMEs are
more labor-intensive, that is they employ more labor relative to capital than large enterprises
producing the similar products. Moreover, SMEs have high potential for employment generation;
require much lower investment per worker compared to large industries. A Bangladesh Small
and Cottage Industries Corporation (BSCIC) estimate shows that BDT 50,000 and BDT 5,000
are required per worker in small industries and cottage industries respectively compared to
BDT 500,000 in large- s c a l e industries.
Though the economic significance of the SMEs in our national development efforts has been
ritualistically recognized in all the Five Year Development Plan of both pre- and post-
independent Bangladesh, the sector received very little attention in terms of allocations of public
investments or operational policy formulation and institution building. SME‟s were declared a
priority sector for the first time in the Third Five Year Plan and a set of promotional measures
was envisaged to be offered facilitating their development. After a long time, SME sector has
been declared as a “priority sector” in the Industrial Policy, 2004 and various measures have
been initiated to help maximize the SMEs‟ growth potential.

6. SME’s Population
There are information limit regarding the total number and types of SMEs existing in
Bangladesh. Moreover, estimates of the SME population vary in line with different definitions of
SMEs. Based on the Economic Census, the total number of SMEs is estimated at 79,754
establishments, of which 93.6% are small and 6.4% are medium Another study, the “National
Private Sector Survey of Enterprises in Bangladesh” by the International Consultancy Group
(ICG), UK, in collaboration with the Micro Industries Development Assistance and Services
(MIDAS), in 2003, revealed that there were approximately 6 million micro, small and medium
enterprises (MSMEs), which included enterprises with up to 100 workers employing a total of 31
million people, equivalent to 40% of the population of the country of age 15 years and above
Promoting SME in Bangladesh
A number of studies have already argued for promoting SMEs in the developing countries. For a
country like Bangladesh, has identified some oft-cited economic, technical and social arguments
that put forward in favor of SME promotion, such as creation of large scale, low-cost
employment opportunities, use of locally available inputs and technologies, mobilization of
small and scattered private savings, development of industrial entrepreneurship, promotion
of linkages through subcontracting and dispersion of industries and reduction of income
inequalities. A c a r e f u l s c r u t i n y o f t h e s e arguments would reveal that the
underlying justification for emphasizing SME development in the developing countries is
derived from the factor proportion disequilibria (i.e., scarcity of capital and abundance of labor)
facing these countries. Unfortunately we do not have much reliable information about the
number and activities of SMEs and their contribution in the national economy. An informal
estimate by Planning Commission of Bangladesh has reported that the SME sector accounts for
more than 80% of private establishments, approximately 80% of industrial units and
employs 23% of the total labor force of the country, and about half of the gross industrial output
(Sia, 2003). suggests that SCIs are responsible for giving birth to 59% of the new industrial
enterprises in Bangladesh during 1980s. SCIs confer social and political advantages as small

7. enterprises were thought to promote democracy and equality.Regarding this sector‟s contribution
to GDP, neither the Bangladesh Bureau of Statistics (BBS) nor the Annual Economic Review of
the Ministry of Finance show segregate data for SMEs. The coverage is restricted to large and
small industries, whatever might be the
Definitions of these two categories.
The relative contributions of the large and the small industries during the last 10 years are And
so far employment is concerned; millions of men and women are engaged in SCIs, mainly in
rural industries on full or part time basis. The Rural Industries Study Project (RISP, 1978-
81) conducted by Bangladesh Institute of Development Studies (BIDS) found 2,17,000
persons are involved in rural on full or part time basis in the 11 study Upzilas, accounting for
about 25% of the total labor force of the Upzilas (Ahmad, 1984). The sector now provides
employment to roughly 5 million workforces, which accounts for 82% of the total industrial
labor force and generate between 45% to 50% of the total manufacturing value added. On the
other hand, SME uses resources more efficiently (fewer resources per unit of output) compared
to its large-scale counterparts.
Regional imbalance in development that also exists in our country can be corrected through
promotion of SMEs in backward areas, because SMEs are locationally flexible and can be
widely dispersed geographically and are more equitable in distributing the income that they
generate. Moreover, SMEs have strong backward and forward linkages with other sectors (e.g.,
agriculture, automobile, transportation sector). For example, there are about 11,00 light
engineering industries (LEIs) presently enlisted with BSCIC which are continuously supplying
various products (e.g., spare parts, equipment, small and large machinery) under sub-contracting
scheme to different organizations including
Bangladesh Railway, BRTA, BRTC, BIWTA.
Now the question is despite the fact that the SME sector seems so promising why aren‟t they
doing better in Bangladesh? It is unfortunate that many of the SMEs are disappearing,
abandoning the potential role they could have played in economic development. Of course, there
are a number of problems in nourishing SMEs in Bangladesh. A recent World Bank study,
conducted through a survey across 80 countries, covering more than 10,000 firms reveals that the
SMEs face more or less common type of problems across the world. The major obstacles include
problems relating to financing, infrastructure, taxes and regulations and stability in policies.
In terms of ranking, financing appeared to be the top problem.

8. Constraints of SME financing in Bangladesh
Historically, Bangladesh followed a development t strategy in which private investment was
controlled through a host of regulations involving investment sanctioning, credit disbursement,
import licensing, foreign exchange allocation, etc. While these regulatory barriers dissatisfied
private investment in general, the impact fell unevenly on SMEs. This was because of the
relative inability of the SMEs to cope with the regulations compared to their large-scale counter
parts. Thus, the policy regime was largely biased against the SMEs although, illogically,
promoting SME development was a stated objective of successive governments.
In a bid to render its industrial sector internationally competitive and to move towards greater
efficiency in its production structure, Bangladesh implemented a number of economic reforms
during the 1980's, underwritten by the familiar structural adjustment policy. This included
deregulation of sanctioning procedure and relaxation of other regulatory barriers, easing of
import procedure, reducing trade barriers, following a market oriented exchange rate policy, and
implementation of fiscal, monetary and public enterprise reforms.
These reforms helped remove a large part of the policy bias against SMEs that prevailed earlier.
Recent studies confirm that these reforms had positive impacts reflected in a fairly rapid growth
of the sector during the pastdecade. However, because of their structural weaknesses, the SMEs
may need more pro-active policies for their development in addition to the further removal of the
policy biases.
Policy Level Constraints
Public Development Outlay
Although successive five-year plan documents have mentioned development of small, medium
and cottage enterprises as priority area, public development expenditure in this sector has not
been adequate with this declared policy. In the current Fifth Five-Year Plan, the share of the
sector in total public developmen t expenditure has gone down even further. If the sector has to
make much headway, there is need for substantial increase in public investment in the sector
particularly in th e area of training, extens ion, research, market promotion, etc.

9. Trade Policy
During the past decade, extensive reforms have been carried out in the external trade regime of
Bangladesh. The import procedure has been greatly eased and deregulated. Import tariffs have
been lowered and quantitative restrictions virtually eliminated. All these have facilitated greater
access of domestic producers to import ed raw materials. This has particularly benefited SMEs as
they were affected more adversely by the regulated trade regime. However, import liberalization
has also exposed domestic producers to competition from foreign goods. To ensure a level
playing field and to enable domestic SMEs to compete effectively with imports, the following po
licy concerns need to be addressed.
Prior Announcement of Policy Changes:
To enable domestic producers, particularly the SMEs, to prepare themselves to face external
competition there is need for adequate forewarning about impending policy direc tion. This is
particul arly true of trade policy measures. If the government makes prior announcements of it s
impending trade policy changes, particularly with respect to tariff sche dules, investors will be
aware of the degree of competition they will be facing with the changes and will make
adjustments in their investment and production plans accordingly.
Tariff Rationalization:
To encourage domestic production, there should be adequate gap between duty on raw materials
and duty on finished products. In fixing duty on finished products, possible under-invoicing and
dumping should be taken into account, as otherwise, effective duty rates on finished goods will
turn out to be lower than that on raw materials in spite of the higher stat utory rate on the finished
item.

10. Appropriate Tariff Valuation
To avert the problem of under-invoicing, a system of tariff value has been put in pla ce for
certain categories of imports. There are complaints that these tariff values are often not in line
with the going world price of these items which sometimes puts domestic producers at a
relatively disadvantaged position
Fiscal Policy
Value Added Tax:
The main components of indirect tax in Bangladesh are Value Added Tax (VAT),
Supplementary Duty and Excise Duty. VAT is imposed on producer, manufacturer, importer,
exporter or service renderer under the Value Added Tax Act, 1991, on goods or specified
services, at the rate of 15% at every stage of transfer. VAT paid against the input is adjustable
against the VAT on output to be collected from the buyers and the net sum stands payable on
delivery of goods or specified services to the VAT authority. Exemption is allowed to certain
goods or service or certain taxpayers. All cottage industries, except those producing particular
products, are exempted from VAT. But, manufacturer, producer or service renderer (other than
cottage entrepreneurs), whose annual turnover does not exceed Taka 1.5 million ar e required to
pay Turnover Tax at the rate of 2.5 per cent in lieu of 15 per cent VAT. This limit is too low for
small industries. As a result, small industries are subjected to the same 15 per cent VAT as their
large-scale counterparts. In addition, s upplementary duty is imposed at variable rate s on certain
categories of consumption goods across all size categories. Finally, excise duty applies to a
limited number of items irresp ective of size classification. Thus, in terms of indirect taxes,
there is virtually no differentiation between SMEs and their large-scale counterparts, which is
considered unbalanced by most SMEs.
Tax Holiday:
Similarly, there are no differentiated treatments of SMEs either with respect to duty on capital
machinery or direct taxes. There are provisi ons of tax holidays for enterprises of all size
categories subject to rules and procedures set by the National Board of Revenue. To avail
themselves of tax holiday, enterprises recommended by the relevant sponsoring agencies have to
ge t the approval of the National Board of Revenue, which is a cumbersome and lengthy process.

11. Wealth Tax
Wealth tax is payable by an individual if his net wealth exceeds. As per existing law, no wealth
tax is payable by a company, the usual legal form of a large industry. On the other hand, the legal
form of small industries is usually sole proprietorship, and hence these enterprises have to pay
wealth tax on their business capital
Thus, fiscal policy in Bangladesh is not particularly adapted to provide support to SMEs, which
is pointed out by most SME entrepreneurs as a critical polic y constraint hindering SME growth.
SMEs and NGOs
SMEs appear to be facing discriminatory competition from the commercial activities of NGOs.
On the other hand, smaller units may be receiving valuable assistance in the form of training or
market information from the NGOs. NGOs should be promoting small businesses and not
themselves become competitors – crowding out private enterprises. Further research and debate
on the role of NGOs in promoting SMEs is propounded.
Legal, Regulatory, and Administrative Constraints
As mentioned earlier, policy reforms of the past decade have brought about substantial relaxation
in the investment sanctioning procedure. No prior approval is now required for investments
involving own finance. However, there is scope for further improvement in the following
procedural aspects relating to investment regulations.
Trade License:
Investors are required to procure trade license from local government bodies by paying statutory
fees. The process involves unnecessary delays, harassment and side payments. The procedure
needs to be simplified and the issuance of the license made automatic subject to payment of
requisite fees and declaration by the investor that the proposed investment is in conformity with
the rules and regulations and zoning restrictions of the local government authority.

12. Registration under Factories Act
According to the Factories Act 1965, all manufacturing units employing 10 or more workers are
required to be registered with the office of the Chief Inspector of Factories and Establishments.
The job of the Factory Inspector is to oversee the working condition and safety measures in the
factory. In practice, the regulation has proved to be a major source of delay, harassment and
unofficial payments for the investors particularly for those in the SME sub-sector as the existing
regulations do not differentiate between different size categories with respect to safety and
working conditions requirements. To relieve the invest ors of these problems the requirements
relating to safety and working conditions should be defined separately and realistically for the
SMEs and the discretionary powers of the Inspector should be minimized. Registration should be
automatic once the investor has declared that the requirements have been complied with.
Clearance from the Department of Environment:
All industries are also required to obtain a certificate from the Department of Environment in
respect of proper arrangement for anti-pollution and safety measures. Here again, the
requirements should be clearly stated for the type and size categories of industry and the
investor should be allowed to go ahead with investment on the basis of the undertaking th at the
requirements will be complied with.
Registration with Sponsoring Agency:
Registration with sponsoring agencies such as the Bangladesh Small and Cottage Industries Co
rporation (BSCIC), Board of Investment (BOI) or Bangladesh Export Processing Zone
Authority (BEPZA) is voluntary unless an enterprise wants to avail itself of government
incentives. To keep track of private investment in various sub-sectors, it woul d be useful to
make registra tion with the sponsoring agency mandatory. However, to relieve the investor s of
possible hassles, registration procedure should be simplified requiring minimum information to
be provided by the investor, and registration should not be held up until the proof of investment
has been produced as the current practice appears to be.

13. Contract Enforcement and Resolution
This is a constraint, which is faced by both large and small firms. Inadequacy in the system for
contract enforcement and resolution arises from archaic legal system where proc endure of
adjudication is long drawn out and cumbersome and the system is corrupt. As a result it is not
difficult to delay a scheduled date for hearing. SMEs with low sustaining power often lose out in
the long drawn out court battle.
Financial Constraints
Access to Finance: SMEs encounter great difficulties while raising fixed and working
capitalbecause of the reluctance of banks to provide loans to SMEs. Banks are shy to lend to
SMEs because of high processing and monitoring costs of loans to SMEs. The loan application
forms for investment financin g from banks are long, tedious, and redundant. Since the removal
of the interest rate subsidy without the removal of interest band, financial institutions find little
incentive to lend to SMEs. SMEs find it difficult to use non real estate assets as collateral to obt
ain loans from the banks.
In the past, the government has attempted to provide SMEs with access to finance through
targeted lending. There was a government directive e that 5 per cent of a bank's loan portfolio be
set aside for small and cottage industry financing. A new bank, namely, the Bank of Small and
Cottage Industries (BASIC) was set up in 1988 with the objective of financing the small and
cottage industries. There were also attempts to channelize fund received from international
agencies such as the Asian Development Bank (ADB) to the sector through private banks. There
were provisions of favorable debt equity ratio, special interest rates and credit guarantee scheme.
The central bank also issued directives to both public and private commercial banks regarding
working capital loans, use of standardized documentation procedure and time limits for credit
sanctioning and loan disbursement. Notwithstanding all these arrangements for financing of
SMEs, the actual delivery of institutional credit to this sector has been grossly inadequate. The
following seem to be the key factors inhibiting flow of institutional finance to the sector.

14. Project Preparation and Evaluation
The first problem entrepreneur‟s face in seeking institutional finance is with rega rd to
preparation of the project proposal. In spite of directives from the central bank to follow st
andardized procedure, the loan application process has still remained lengthy and cumbersome.
The entrepreneur often lacks the ability to formulate a proper project proposal. Even when he
prepar es the proposal drawing on outside expert services, there is no guarantee that the proposal
will be evaluated properly as the financial institutions themselves lack adequate capability for
proper project evaluation.
Collateral Requirements:
One of the main factors that have hampered flow of institutional finance into SMEs is banks'
pre-occupation with coll ateral based lending. Traditionally banks have used fixed asset
ownership, particularly land ownership as the basis for judging credit-worthiness. This puts SM
Es at a relative disadvantage, as large entrepreneurs are often able to get around the problem
because of their influence and contacts by putting up collateral of dubious valuation. Th e
solution to this problem lies in banks seeking deposit relationship with owners of SMEs and
using cash flow rather than asset ownership as the criterion for credit-worthiness. An expanded
credit guarantee scheme will have to play a vital role in this regard
Bureaucracy and Corruption:
Because of lack of proper autonomy and accountabilitythe public sector financial institutions are
beset with inflexibility, in efficiency, political interventions and corruption. Si nce the
performance of the ba nk officials is not properly evaluated they lack the incentive to bring a larg
e number of suitable borrowers, particularly those in the SME sector, within the fold of in
stitutional financing. They adopt a passive and inflexible attitude towards the borrowers either to
avoid the risk of making an inappropriate lending or to force the borrower to make side payments
for more favo rable handling of the loan application. Until necessary reforms in the public
financial institutions are carried out, the SMEs will continue to bear the brunt of this institutional
malice

15. Major Industrial Constraints
There is a growing literature on various constraints th at have impeded the growth of SMEs in
Bangladesh.
Major Findings:
Various studies have been conducted to identify constraints encountered by entrepreneurs in the
industrial sector. The sub sectors include: Steel Furniture, Small Metal Works and Light
Engineering, Electrical Small Goods, Plastic Products, Specialized Handloom, Bakeries, Te xtile
Dyeing and Printing, and Footwear. According to legal barriers, excess competiti on, and dearth
of technical assistance. A summation of the scores from the various studies reveals that credit
and working capital have consistently remained as the major bo ttlenecks to industrial growth in
Bangladesh. Electricity problem is also ranked close to credit as a serious problem at present and
in the past. Unavailability and/or high price of raw material, poor law and order conditions and
legal barriers are cited as serious problems, but not as highly as credit and power
The SMEs have received disproportionately smaller support from the government in terms of
policy or fiscal incentives. SMEs, as a gr oup, are weak in echoing their needs and demands.
There have been improvements in the sanctioning and other administ rative procedures affecting
SMEs; further simplification, transparency, and accountability are necessary to promote SME
development. A wide array of constraints faced by SMEs has been briefly discussed in this
report. It is apparent that problems related to power and credit is the two most significant ones.
Legal barriers, poor law and order conditions, are some of the other problems that have adverse
affect on SME development.

16. Prospects of SME Development in Bangladesh
Contribution of Banks to SME Sector
SME financing is a high risk service with low profit, discouraging the banking sector to extend
loans to this sector. However, banks cannot ignore an emerging sector like SMEs. That is why,
banks are continuously endeavoring to evolve appropriate model(s) of financing SMEs.
Generally, banks provide both working and other than working capital financing to large and
medium as well as small industries. Unfortunately, information regarding financial
contribution by banks to this sector is not segregated. It is clear that both working capital and
other than working capital financing is higher in large and medium industries than that of small
industries. Recently, working capital financing has been increased in large and medium as well
as in small industries. That may be because of the recently formulated USD 30 million “Small
and Medium Enterprise Sector Development Project” in Bangladesh Bank. We have shown that
in terms of contribution to SCIs, nationalized commercial banks (NCBs) come first
followed by private commercial banks (PCBs) and specialized banks (SBs). The reason
behind the upward contribution of PCBs. The growth rate of PCBs declined thereof. Under
another credit guarantee scheme, Government released BDT 25.00 Crores to Bangladesh Bank
for providing guarantee facility to investors in SCIs. However, the growth became quite sl
uggish in the year 2000 and 2001 because of the abeyance of new proposals under the scheme as
per decision of the Ministry of Finance of 14 September 1999 (Bangladesh Bank Annual Report
2000-2001). Moreover, only the NCBs have extended credit to priority sectors in response to
government directives that at least 5% of a bank‟s loan portfolio be set aside for SCIs financing,
although this is not sufficient. The contribution of PCBs in developing this sector is very meager.
It seems that they even do not care for the government directives. For example, in 2001, NCBs
have outstanding loans and advances of BDT 504.93 Crores in SCIs, which is 1.54% of
total loans and advances outstanding, whereas PCBs have BDT 303.32 Crores (0.86%
of total loans and advances outstanding) and SBs have BDT 110.74 Crores (1.02% of total
loans and advances) (Siddiquee, 2003). Poverty in Bangladesh is a chronic and acute problem.
Whether the situation has really proved or not is a debatable issue. The experi ence so far
gathered from the activities of the microfinance institutions indi cates several acute problems and
shortcomings in the
programmes. Today there is a widespread perception that most of th e laws under which the
microfinance institutions are operating seem to have fallen short in dealing with their
institutional and operational aspects. Microf inance institutions, which are basically NGOs

17. providing financial services, do not fall under the government regulations that are applied to
banks and other non-bank financial intermediaries. Actually, they are in need of appropriate
regulatory frameworks. The absence of a sing le registering, monitoring and supervising
organization appropriate for the microfinance institutions in Bangladesh has made it difficult to
decide if they have been targeting the right people and for the right purpose. If a SME institution
is to maintain its capacity holdings, it must generate sufficient revenue to meet its operating
costs, including the co st of administering loans, mobilizing and training groups, mobilizing
funds for on-lending, and covering bad debts.
Although a number of microfinance institutions are showing their financial efficiency, in most
cases this is misleadi ng since the borrowing cost of on-lending funds is highly subsidized by
donors. Performance evaluation of SME given by microfinance institutions is increasingly
important. It is very difficult to evaluate the performance of the large number of NGOs
operating in Bangladesh. In Bangladesh, the major sources of SME institutions revolving loan
funds are the commercial banks, PKSF, members‟ savings etc. There are complaints that the
microfinance institutions in Bangladesh have been charging an exorbitant rate of interest on their
loans. According to a study conducted by Bangladesh Bank (1997), it was found that the
effective rate of interest charged by Grameen Bank is 22.45 per cent while the formal sector
interest rate ranges from 10 per cent – 12 per cent for the small and cottage sector. Hashemi
(1997) and Khandoker (1995) point out that Grameen Bank would operate at a loss without
grants. As pe r the regular statutory rules, weekly instalments are started by the borrowers to
repay the principal and interest from the subs equent week after obtaining the credit. This
procedure puts serious economic and mental pressures on the borrowers. In many cases, it is
found that due to the pressure of repayment, overlapping problems in SME have emerged.
A major shortcoming of the microfinance institutions in Bangladesh is that they do not always
reach the hardcore poor – the poorest of the poor. Si nce the absolute poor run a higher risk for
loan default, they often fa ll outside the coverage of the microfinance institutions. At the same
time, the poor people with more than 0.50 acre of land do not fallunder the programme. So, a
huge number of disadvantaged people are left out from the programme. Moreover, the
microfinance institutions follow the same rules/ obligations of
SME for all regions of the country. This has created different problems, such as economic
depression and underuse of potential. Not all pa rticipants are skilled enough to initiate self-
employment schemes, but are in need of opportunities in wage employment. The microfinance
institutions do not have a proper coordination mechanism that would enable them to ensure
effective coverage in all areas of the country. While some provide a broad range of services,
most of them provide li mited credit and savings options. Thus, proper representation also
requires that the poor have the opportunity to receive as many services as they need. The
microfinance institutions are al so beset with fund constraints and there are no linkages between

18. the financial institutions at the grass-roots level. On the other hand, owing to the absence of a
national policy on SME and a nationwide default culture, loan repayment at the microfinance
institutions is affected by the spillover effect of those big borrowers. The bulk of the loans
advanced by microfinance ins titutions in Bangladesh is targeted towards women. In reality,
however, the male members of the household initiate taking loans and control the funds received
by the female members. Furthermore, Aminur Rahman (1999) pointed out that loans taken are
often used for purposes other than those the loan is sanctioned for. Rezaul Karim and Osada
(1998) observed that there was a steady increase in the dropout rate from the Grameen Bank (15
pe r cent in 1994) and that 88 per cent of the total dropouts did not graduate to the status of non-
poor. Ahme d (1998) finds that a larger association with Grameen Bankreduces the household
income.
Recommendations for SME development
Despite many shortcoming and criticisms raised by a group of research ers about the function,
impact and sustainability of the SME programmes in Bangladesh, SME, have made a successful
breakthrough in reaching the target group mainly because of the easy availability of funds and
close supervision. It is pertinent to further gear up the activities of the SME for the sake of
poverty alleviation and also to deal with socio-economic-financial issues of the urban and rural
areas. Although SME is not th e solution for poverty alleviation and rural enlistment in a
developing country like Bangladesh, the supportive services of SME institutions for primary
requisites (such as hea lth, education, and infrastructure) and financial services (such as savings
schemes, consump tion, investment and insurance services) are essential for the smooth
operation of SME. In order to improve the performance of the SME and targeting group for the
SME, the following measures have been suggested:
(a) Bangladesh Bank and the comme rcial banks should establish separate functional relations
with the SME to provide the required guidelines, supervis ion and financia l assistance.
(b) Close cooperation among banks and organs of the government for soci al welfare activities is
essential for the effective coordination of their activities. Integration can improve the efficiency
of segmented rural financial markets by exploiting the comparative advantage of each sector.

19. (c) A regulatory body is essential to monitor the activit ies of SME instituti ons in Bangladesh,
besides internal regulation by themselves, through governance and transparency in the
disclosure of all types of their accounts and documents.
(d) Accounting systems, management informa tion systems services, the calculation method of
the recovery rate of the SME institutions should be rationalized and transparent.
(e) An initiative should also be considered to establish a link among the medium- sized, small
and cottage industries and the co rporate sector through the deve lopment of subcontracting.
Banks and non-bank financial institutions could create funds for the development of
subcontracting enterprises.